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Paradoxically, while demanding that other countries comply with FATCA, the United States itself has become the second largest secrecy haven in the world according to the Financial Secrecy Index (“FSI”) released by the Tax Justice Network (“TJN”) at the end of January of 2018. Let’s explore why the 2018 FSI considers the United States a Tax Haven.

What is 2018 FSI?

The TJN’s FSI is considered to be one of the most comprehensive assessments of secrecy of financial centers. It is published every two years using independently verifiable data. Its methodology is based on the European Commission’s Joint Research Center. The 2018 FSI, however, is not considered to be influenced by any political considerations.

The FSI is based on various criteria which is updated with each publication. The assessment of a country’s financial secrecy includes such consideration as: requirement to identify beneficial owners of companies, trusts and foundations; whether annual registries are made available to the public in an online format; the extent to which the countries’ financial secrecy rules are forced to comply with the anti-money laundering standards, and so on.

In order to create the index, a secrecy score is combined with a figure representing the size of the offshore financial services industry in each country. This is expressed as a percentage of global exports of financial services. The responsibility for bigger transparency increases with the size of the financial services industry of a country.

In 2018, new indicators where added to what are now considered 20 Key Financial Secrecy Indicators “KFSI”. The 2018 FSI new factors ask whether a jurisdiction in question provides for public register of ownership and annual accounts of limited partnerships; public register of ownership of real estate; public register of users of freeports for the storage of high value assets; protection against prison for banking whistleblowers; harmful tax residency and citizenship rules; and other factors.

2018 FSI Placed United States as Second Largest Secrecy Haven Among the Top 10 Countries

Based on the consideration of all of these factors, including KFSI, the 2018 FSI placed United States as the second largest secrecy haven among the top ten countries. Here is the full list of top ten countries:

What this means is that the United States is now the country that, with the exception of Switzerland, most contributes to financial secrecy in the world.

Reasons Behind the US Rise in the 2018 FSI Ranking

The second rank of the United States was assigned due to its growing share of the offshore financial services industry. According to 2018 FSI, the US market share of the offshore financial services industry is 22.3%. It was 19.6% in 2015. In fact, in order to occupy the second place in the 2018 FSI, the United States displaced such a notorious offshore haven as the Cayman Islands.

There are other objective reasons and comparative reasons for the US rise to the second place of the 2018 FSI. The main comparative reason is the European Union’s lead in the transparency initiatives. The EU is now the definite leader in combating financial secrecy.

The objective reasons are various. The United States does not have any beneficial ownership registries. It also lacks the country-by-country reporting of corporate profits (although, this may change). Finally, the United States continues to refuse to join the OECD’s Common Reporting Standard (“CRS”).

The Second Place in the 2018 FSI Points to Dubious Cost-Benefit Analysis

The second place in the 2018 FSI is not accidental. Rather, there is a cold, though morally dubious, cost-benefit calculation behind it. On the one hand, the United States was the country that really propelled the global fight against bank secrecy in the years 2008-2014. It trampled all over the vaulted Swiss Bank Secrecy laws when it came to its pursuit of US tax evaders, enacted the revolutionary FATCA legislation, forced the vast majority of foreign financial institutions to share information (including beneficial ownership information) with the IRS concerning US owners of foreign accounts, and engaged in a number of other activities to increase the worldwide financial transparency with respect to US taxpayers.

On the other hand, all of the US efforts to combat bank secrecy were not a fight for transparency ipso facto. Rather, the US government was only interested in fighting bank secrecy in so far as it concerned US taxpayers. With respect to its own bank secrecy laws concerning foreigners who wish to invest in the United States, the US government is on par and even exceeds some of the most secretive tax havens.

In other words, when it comes to fighting US tax evasion, the US government is an innovative champion. With respect to attracting investment in the United States, the same US government seems to do everything possible to turn the United States into a tax haven. This is precisely why it never joined the CRS.

While the US government seems to be acting in the name of the national self-interest, there is one huge problem that this policy creates. Currently, the elites of the most corrupt regimes, mafias and cartels of all stripes, narcotics dealers and other criminals can see the advantage of using the United States as a haven for illicit financial flows, including money laundering and funding of terrorism. There is also an increased danger that the corruption created by one part of the US financial policy may spread to other aspects of our society.

In other words, the current US bank secrecy policy seems to be in contradiction with other stated policies which attempt to specifically target the aforementioned criminal activities. This contradiction is an easy target for critics of the US financial policy and may contribute in the future to potential reversals of the current gains in international financial transparency.

http://sherayzenlaw.com/wp-content/uploads/2018/01/sherlawltd_logo.png00Managerhttp://sherayzenlaw.com/wp-content/uploads/2018/01/sherlawltd_logo.pngManager2018-04-10 12:19:082018-04-11 19:21:502018 FSI Ranks United States as Second Largest Secrecy Haven | FATCA

On December 5, 2017, the European Union (the EU) Council published its list of the non-EU non-cooperative tax jurisdictions. The list included American Samoa and Guam unleashing strenuous objections from the United States.

Criteria for Inclusion in the List of Non-Cooperative Tax Jurisdictions

The list of non-cooperative tax jurisdictions was formed out of tax jurisdictions that failed to meet three criteria at the same time: transparency, fair taxation and the implementation of anti-base-erosion and profit-shifting measures.

The EU Reasoning for Including American Samoa and Guam on the List of Non-Cooperative Tax Jurisdictions

The EU reasoning for including American Samoa and Guam on the list of non-cooperative tax jurisdictions is a peculiar one because it does not seem to care about the fact that both jurisdictions are only US territories with no authority to separately sign international tax commitments (i.e. everything is done through the United States).

In particular, the EU Council specifically criticized American Samoa and Guam for three failures. First, American Samoa and Guam did not implement the automatic information exchange of financial information. Second, both jurisdictions did not sign the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Finally, neither American Samoa nor Guam followed the EU’s BEPS minimum standards.

US Objections to the Inclusion of Its Territories on the List of Non-Cooperative Tax Jurisdictions

In his letter to the Council of the European Union, the Treasury Secretary Steven Mnuchin strenuously objected to the inclusion of American Samoa and Guam on the list of non-cooperative tax jurisdictions. The Treasury Secretary set forth the following reasons.

First, he objected to the publication of the list per se as being “duplicative” of the efforts at the G-20 and OECD level.

Second and most important, Mr. Mnuchin stated that the EU reasoning does not make sense, because American Samoa and Guam “participate in the international community through the United States”. The fact that the United States agreed to implement BEPS minimum standards and the tax transparency standards should be considered as the agreement of American Samoa and Guam to do the same. In other words, he argued that American Samoa, Guam and the Untied States should be considered as one whole legal framework.

Based on this reasoning, Mr. Mnuchin urged the EU to immediately remove American Samoa and Guam from its list of non-cooperative tax jurisdictions. It should be noted that several other jurisdictions also rejected their inclusion on the list.